Question
The free cash flows (in millions) shown below are forecast by Simmons Inc. If the weighted average cost of capital is 13% and the free
The free cash flows (in millions) shown below are forecast by Simmons Inc. If the weighted average cost of capital is 13% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions? Year: 1 2 3 Free cash flow: $20 $42 $45 Problem 4 [5 points]: The stock of Cacique Corp. is expected to have earnings per share (EPS) next year of $6 per share. The required return for its stock is 15%. (a)What is the stock price if Cacique retains 50% of its earnings to finance future growth, and these funds are invested in projects with a return on equity of 15 percent? Assume that Cacique has more projects right now, and it has to retain 70% instead of 50%. What is the price of the stock now if the return on equity is still 15 percent? (b)Assume right now that Cacique C.A. can earn 18% (ROE=18%) on its investments. What is the price if the retention ratio is 50%? What is the price if Cacique retains 70%? (c) Can you explain the difference obtained in the results of (a) and (b)?
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